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Acct 3401 Ch. 4 Exercise - GADGET WORLD Name: ________________ Discontinued Operations GADGET WORLD, Inc. is an electronics retailer. In addition to operating its Gadget World product stores, for the last 5 years the company has run a service divisioncalled \"Nerd Patrol\"that offered installation and repair service to its customers. The service business has not been as successful as management had hoped and the decision was made and announced on October 31, 2016 to get out of the service business. At this date, the applicable tax rate is 30%. Case 1: Disposal Date Before Year-End In this case, the disposal occurs before year end: the Services division is sold on November 30, 2016before the fiscal year ends on Dec. 31, 2016. The following worksheet shows GADGET WORLD's operating results for 2016 and 2015 (note: normally a company reports 3 years of results on its Income Statement, but we're working with 2 years due to the limited space here): 2016 2015 Compan y Divisions Product Total Services s $165,00 $225,000 $60,000 0 Sales Compan y Total $230,000 Divisions Service Product s s $150,00 $80,000 0 $75,000 $20,000 $55,000 $110,000 $25,000 $85,000 $150,000 $40,000 $110,00 0 $120,000 $55,000 $65,000 Less: Operating Expenses $10,000 $5,000 $5,000 $10,000 $5,000 $5,000 Operating Income(loss) $140,000 *$35,00 0 $105,00 0 $110,000 $50,000 $60,000 Cost of Goods Sold Gross Profit Gain(loss) on sale of assets Income before taxes Income tax expense/ (benefit) Net Income(loss) * 2016 Services Div. operating income includes activity thru 11/30 only. Required (continued on the next page): 1) What is the Operating income (loss) (before taxes) for the division that has been sold? 2016: ___________________ 2015: ___________________ (thru the disposal on 11/30 as indicated above) 2) Would we need to make a journal entry to record the operating income/loss results? The assets of the Services Division were originally purchased for $4,300,000, but have accumulated depreciation (thru the 10/31 announcement date) of $2,300,000. When the assets Ch. 4 Exercise - GADGET WORLD Acct 3401 Name: ________________ Discontinued Operations are classified as \"held for sale,\" a journal entry is made to transfer the assets from an operating category (like \"Plant, Property & Equipment\") to an investment (usually in Current Assets since the sale is expected within a year). Assets held for sale are not depreciated. For example: (A) Assets Held For Sale 2,000,000 (A) Accumulated Depreciation 2,300,000 (A) Assets 4,300,000 note: Record classification of Services Division assets as \"held for sale\" 3) The Services Division was sold for $2,050,000, but $150,000 was spent in legal and closing costs to complete the sale. What is the gain or loss on this disposal? Complete the \"Gain/loss on sale of assets\" and \"Income before taxes\" rows of the worksheet above. 4) What journal entry should be made to record the disposal gain or loss? 5) What is the tax effect of the operating results and the disposal? Complete the \"Income tax expense/(benefit)\" and \"Net income(loss)\" rows of the worksheet above. 6) Prepare an Income Statement: 2016 Sales Cost of Goods Sold Gross Profit less: Operating Expenses Income Before Taxes and Disc. Oper. Income Tax Expense/(Benefit) Income from Continuing Operations Discontinued Operations: Income(loss) from operation Gain(loss) from disposal 2015 Ch. 4 Exercise - GADGET WORLD Acct 3401 Discontinued Operations Income tax expense (benefit) Income(loss) from Disc. Oper. Net Income EPS from Continuing Operations EPS from Discontinued Operations Net Income per share Name: ________________